Tentative calm in Seoul, US juggernaut rolls on

As a degree of calm descends on South Korean markets, for now at least, Asia is set for a positive open on Thursday as investors also draw encouragement from another record high on Wall Street and US bond yields falling to the lowest in a month.

Federal Reserve Chair Jerome Powell’s upbeat remarks on Wednesday – that the US economy is in “remarkably” good shape and he feels “very good” about where US monetary policy is – will also support investor sentiment and risk appetite.

The S&P 500 rose for a fourth day on Wednesday for its 55th record high this year, and has now fallen only once in the last 12 trading sessions. The Nasdaq registered its second 1% gain this week.

US bond yields declined across the curve, most notably at the short end where the two-year yield fell to 4.12%. That’s the lowest since the US presidential election on Nov. 5, signaling that this particular leg of the so-called “Trump trade” has fizzled out.

The fall in yields, partly fueled by surprisingly soft US service sector data, was accompanied by a weaker dollar, offering a double dose of relief for Asian and emerging markets.

Investors will also draw comfort from the apparent financial stability in South Korea, even though the political situation remains extremely tense and fluid.

The won has recovered most of the losses that pushed it to a two-year low on Wednesday, and short-term implied won volatility has eased too. On the other hand, Kospi futures are still pointing to a fall of more than 1% for local stocks at Thursday’s open.

Meanwhile, market signals from China are also pointing to relative calm in FX but weakness in stocks. The yuan rebounded from a 13-month low to clock its biggest rise in a month on the onshore spot market, while weak service sector data and trade tensions with the US pushed stocks into the red again.

The Australian dollar remains on the back foot after GDP data on Wednesday showed that Australia’s economy expanded more slowly in the third quarter than was expected. That said, the central bank’s first rate cut is still not fully priced in until April, according to the interest rate swaps market.

The calendar in Asia on Thursday sees the release of revised South Korean GDP data, inflation numbers from Taiwan and the Philippines, retail sales from Singapore, and Australian trade.

As political uncertainty swirls in Seoul, it’s worth noting that Asia’s fourth-largest economy only narrowly avoided what would have been a rare recession, according to initial estimates, contracting 0.2% in Q2 and rebounding 0.1% in Q3.

Here are key developments that could provide more direction to markets on Thursday:

– Reaction to political developments in South Korea

– Fallout from the collapse of France’s government

– Taiwan, Philippines inflation (November)

(Reporting by Jamie McGeever; Editing by Diane Craft)